Monthly Archives: August 2009

The Kitimat LNG plant in British Columbia was planned four years ago to import gas. But now

The shale gas play has set up a scenario in which the amount of natural gas available in North America will likely exceed the combined US-Canada demand.

Kitimat was originally set up to import Australian or Sakhalin gas. But what a difference shale has made. The new Horn River Shale discovery in Northern BC has so much gas that it will be just about the first North American gas to be diverted from the home market. Obviously no one is worried about gas shortages there. Kitimat will export to Korea and elsewhere in the Pacific. And where will that Australian gas go? In the best case scenario it will continue to go to Asian markets, but pushing down prices as it goes. In the other best case, Australian gas will (as it did this past winter) show up in the UK, pushing prices down here.

But if gas is exported, it also pushes down the need for LNG imports to the US, which will push down prices in Europe. Win, win, win for gas consumers, or at least those lucky enough to live in a market where regulators trust markets, not suppliers.

Some in the UK dismiss wind as being intermittent, expensive and generally not as workable as spending £4 billion (each!)on a nuke plant.

It's well known that first Denmark, and then Spain and Portugal, followed by that country with the long coastline, Germany have had some success in not only installing wind capacity but creating an industry on top of it. Actually when measured as percentage of energy, famous maritime power Luxembourg has more wind installed and contributing to the grid than the UK does.

Up to 39 percent of Ireland’s demand for electricity was met from wind at certain times on July 31, added Mr. Kelly, who noted that Ireland has a target of getting 40 percent of its energy from renewable sources in 2020. In 2008, the amount of power generated from renewable sources in Ireland was about 11 percent.

Interesting here is that Ireland may potentially have too much power and will have to limit production unless an inter-connector is built to supply the UK with all the excess.

Mr. Kelly of Eirgrid said that development of a 500-megawatt interconnector between Ireland and Wales was at an advanced stage, and it would enable power from Ireland to be exported at times. He said that the new interconnector was due for completion at the end of 2012 and would cost about 600 million euros ($850 million).

“It is expected that the majority of output from wind generation in the Republic of Ireland will be used by consumers in the Republic because of our renewable targets,” Mr. Kelly said. “But obviously there is an opportunity for excess (at times of low demand or high wind output) to be exported.”

Lots of green energy for a quarter of the cost of a nuclear power station. Maybe we can start accusing the Irish of stealing our power.

John Podesta, the head of the think tank Center for American Progress, twice cited the potential of natural gas—not just any gas, but “shale gas” extracted from underground rocks—to replace “dirty coal.”

Sen. Reid opened his remarks by saying, “I’ve been converted. I now belong to the Pickens church,” in reference to the plan pitched by Oklahoma oilman T. Boone Pickens to ramp up the role of natural gas (and wind power) in U.S. electricity generation. Natural gas has roughly half the carbon emissions of coal when used to generate electricity.

That echoes remarks House speaker Nancy Pelosi last year, when she referred to natural gas—which is, after all, a fossil fuel—as clean energy and an “alternative” to fossil fuels. At the time, that raised a mild firestorm. Now, the idea is apparently mainstream

The history of UK energy (and much else), is follow the American example. Why should this time be any different? Americans don't think that God has given them a gift in the form of geologic formations that are unique source of clean energy that no one else on the planet will be able to find. It's time for UK policy makers to start asking questions. But for now questions are being asked. In India.

Why has no company in India explored for shale gas despite several rounds of bidding for exploration blocks in the last two decades? The sad answer is that our exploration policy allows companies to produce only conventional oil and gas from their exploration blocks.

They said it could never happen, although NHO did back in March: US gas storage, the equal of the rest of the world's storage combined is almost full. And it's not full because of low demand. This isn't a temporary aberration which will soon disappear sending prices zooming up again, now that the stock markets are playing Happy Days are Here Again. That argument is also one perennial peak oil bulls and UK energy catastrophists bandy about in their desperate attempts to hold up prices through scaring people.

What's happening in the US is peak demand and peak supply. Peak demand is the realisation that end-users do have a small number of alternatives to high prices that in aggregate deliver meaningful, permanent and growing demand destruction. "Conventional" energy experts have always dismissed the impact of conservation, efficiency, new technology and renewables. But little things mean a lot when there are a lot of little things: that's the impact of scaling up.

Peak supply is the sudden flooding over the past year of the market by shale gas producers. But what is getting interesting is that shale isn't working out as the nay sayers were saying even six months ago. At that time, the theory was that "unconventional" gas was expensive. If prices got too low, shale gas production would shut in as people would lose too much money, which would increase gas prices all over again. There would also be, according to a theory that sounded born out of desperation, not reality, that when US gas prices recovered, the US would suck in LNG (and it would have to really suck given the simultaneous surge in LNG production throughout the world) which would then push up UK prices which are increasingly linked to US prices.

U.S. natural gas producers are pumping huge volumes of the fuel into a market about to have its fill – an event that could push gas prices even lower and create pain across the industry

The situation underscores how the natural gas industry is changing, thanks to vast new gas supplies trapped in dense rock formations known as shales. New technology has allowed producers to increase output from these rocks even as the industry, as a whole, spends less on drilling. But a further slump in price may squeeze cash-strapped producers that are already struggling amid an economic downturn that has undermined energy demand.

As we were saying, conventional wisdom was producers go on a production strike. But apart from the obvious that any price at all beats no price at all, as "unconventional" gas goes mainstream, producers are learning how to produce shale at lower costs for lower prices:

But companies are counting on the diminishing cost of shale gas extraction in order to make it through the slump. Anadarko Petroleum, which saw its production jump 12% in the second quarter, said it would ramp up activity in the Marcellus Shale – a vast natural gas field stretching from West Virginia to New York – where the company can achieve a 10% rate of return at gas prices of $2.50 a million British thermal units.

Which considering the year low for gas is about $3.2 should make UK traders mighty nervous, and they should be looking over at their US colleagues:

Aubrey McClendon, chief executive of Chesapeake Energy said that there will be much "wailing and gnashing of teeth in the next 60 days" across the industry as storage fills.

But at the same time producers are turning in big results from natural gas fields that have cropped up around the country. And some producers aren't willing to hold back gas in order to defend prices.

"Pretty soon, everybody is going to start involuntarily curtailing gas so we don't see any reason to take it on the chin for the team any more than we did," McClendon said during a conference call. The company stopped curbing output in the second quarter, and saw a production increase of 5% from a year ago.

When US gas fills up, during September it will impact the UK as the US sets the price for LNG, which sets the price for the UK and Europe.

Crashing demand meets low LNG prices, high LNG production, high storage levels, Norwegian and North Sea production returning from maintenance and plenty of Russian gas sold outside of the usual oil index links. This will get interesting. We never thought we'd see single figure pence per therm gas again. We don't do predictions. But we keep open minds about all possibilities. If there is a recovery, which is questionable, peak demand has passed and all we may see for some years is flat gas prices: low prices and low volatility.

Will the UK, so beset by paranoia over foreign gas, end up being the world leader in carbon capture and storage from coal by default by being the only country mad enough to spend all the money (and more carbon) trying it?

Energy bulls invariably blame higher oil on China for increased demand, despite more and more evidence that in energy, as in everything else, China does not want to equal "developed" economies: They want to be better. And one way to be smart is not to repeat Western experience in energy.

China, the world’s biggest carbon- dioxide polluter, is balking at the cost and effectiveness of extracting greenhouse gases from hundreds of coal plants and storing them underground.China can achieve larger emissions cuts instead by spending money improving the energy efficiency of buildings and vehicles and investing in alternative power sources such as wind and solar, said Su Wei, director-general of the climate-change unit at China’s National Development and Reform Commission.“Carbon capture and storage, particularly for China, is not one of the priorities — the cost is an issue,” Su said in an Aug. 4 telephone interview from Beijing. “If we spent the same money for CCS on energy efficiency and the development of renewables, it would generate larger climate-change benefits.”

The UK needs to invent the regulation where individual users can finance efficiency instead of hare brained grand projects which we all end up paying for through energy bills anyway.

He exit from the fold will mean that when the UK mainstream press tries the Fair and Balanced even handed approach on climate change they will have to reply on Jeremy Clarkson, Nigel Lawson or the Flat Earth society:

Having questioned aspects of climate change science in the past, Mr Lomborg now says “the basic scientific questions [on climate change] have been answered pretty unequivocally”.Therefore the question moves on from not whether to try to tackle climate change but how to do so most cheaply and effectively.

Ofgem is the alleged watchdog for consumers, but they've been as useful a watchdog as my labrador recently. They both bark at the wrong people and are easily distracted by suppliers giving them a reassuring pat – and then ignoring them. They don't even rate getting a bone thrown to them.

With the winter months approaching consumers will be facing high household energy bills which will be challenging for all in these difficult economic circumstances and particularly for those in fuel poverty.

Wholesale costs have fallen from last year’s peak and look set to fall further as we head into the winter. In a strong competitive market, we would expect prices to respond to such falls. You will be familiar with these trends and also aware of some public dissatisfaction with suppliers’ response so far to wholesale price reductions.

Ofgem has published two retail/wholesale price reports. The first was embarrasingly bad. It simply reversed engineered the current prices and gave suppliers a free pass by finding the market was just fine thank you. Riddled with infantile errors about the utility market as the first one was, by the time the second came out in May, the facade, or charade, was crumbling. That report added little new, and corrected some errors (how do consumers prefer fixed prices when they have never been given an alternative for example) but couldn't paper over the fact that even with Ofgem still desperately trying to get suppliers off the hook, margins for domestic supply were pushing unprecedented levels.

That was then, and two months later winter gas and power prices have fallen a further 16%. Winter 09/10 is now 62% below the close of July 15 last year, yet retail gas prices have barely moved where they have moved at all.

The recent 90% increase in Centica retail profits shows that Ofgem got it wrong by blaming gas prices last winter on suppliers buying gas forward in July for the next winter. They certainly bought options to do so, but no positions that couldn't get unwound. The actual price is generally the wholesale daily rate that is based on supply and demand. Markets occassionally act irrationally as they do currently, but they can't do it forever in a world market that is awash in gas.

Neither can Ofgem ignore what is patently clear: every single one of us is being ripped off by the big six. We estimate that conservatively the average domestic user is paying 25% over the odds. Multiply 24 million dual fuel customers by the average £1000 spend and we're talking 60 billion pounds. Which is £10 billion over the extra "quantitative easing" the BOE proposed today that caused the pound to tumble.

Finishing up with the canine analogy, if Ofgem can't be a better watchdog, and soon, it's time for a transfer from Millbank to the other side of the river: Battersea.

The MEUC is on the warpath, and they're getting the Telegraph on board.

Customers, both big and small, are jittery. Energy suppliers are playing safety first and attempting to reduce their exposure.

There are unhealthy and costly developments in the market place. Suppliers have been telling some customers they will have to pay in advance for up to six months consumption because they have failed to qualify for cover. In some cases insurers have been rejecting applications for cover in a wholesale fashion,

The run-up to the October round of new electricity contracts between energy suppliers and their customers has raised fears about a "crisis" and brought Ofgem into the ring. The Major Energy Users' Council is concerned that companies will have to turn the lights off if they are unable to get contract cover.

Lights out is a gross over-simplification. Thanks to supplier of last resort provisions, chances of electricity or gas not flowing are slim to none for all except the very, very largest users. But that still leaves the important issue of what the price of that energy would be.

There are existing deemed rates where in the absence of a contract, suppliers can charge rates that are monitored by Ofgem but not in any proactive sort of way. Those deemed rates are meant to encourage the many SME's who don't respond to often repeated attempts to enter into a contract when the current one expires.

The rates involve pass through of transmission and metering costs, a commodity cost and what is meant to be a punitive "administration" fee. But paradoxically, as the commodity costs reflect the marginal balancing costs suppliers incur, an actual delivered price over the next few months will probably be noticeably less than the current rate.

For example, assume an SME signed a one year gas deal at this time last year. The commodity element is 65 to 85% of the delivered price, with the rest varying due to site specific gas transporter prices that depend on peak demand capacity. The margin element has traditionally been very low, rarely more than 5% and often less than 1%.

The one year forward commodity element at this time last year was in the area of 95 pence per therm or 3.24 pence per kWh, which was the highest on record. Gas is the main driver, positive and negative on power prices. But the daily balancing commodity costs have been as low as 22 pence in July and even at the winter peak during the coldest January in many years and Russia/Ukraine supply disruptions prices were 60 pence per therm.

If the SME were unable to get a contract, then the supplier would most likely put them on an out of contract rate that even including an admin fee of up to 15% and transportation remaining the same, the plunge in commodity prices would still mean an actual reduction in energy cost of at least 25% compared to last year. Many SMEs will be happy to see that, and not worry about the details!

The issue that Ofgem can clarify is what is a fair out of contract administration fee, and to ensure that the commodity rate reflects actual wholesale balancing costs for the time of use.

One solution is for end-users could be to enter into a new contract linked to actual use lined to wholesale time of use indices. Such an agreement would incur far less credit risk for suppliers as essentially they would carry forward only three months or so of risk, not an entire year. Risk would be lessened still by removing take or pay issue for suppliers, and any deposits would be far less than for a one year fixed. This could also allow variable credit risk premiums that depend on forward facts instead of fixing them on today's educated guesses.

The purpose of a fixed price contract was to ensure certainty, but as last winter's performance has shown, the out-turn was that many SME's were locked into high prices. Many end users place too high a value on certainty, curious given the seasonalities inherent in almost any business. We now see the cure for energy risk is far worse than any symptoms. Even some very large end-users, badly advised by third party intermediaries, switching sites or other middlemen with a vested interest in promoting "energy risk" solutions offered in an environment of fear, not reality, spend far more money avoiding volatility than they would have spent dealing with its consequences.

These are new times. Which is why we created www.igasandelectric.com to create new thinking, instead of catering to old thinking.

We've never been big on blaming Russia for Europe's alleged gas supply issues. Apart from anything else, it's a Ukraine problem too, and perhaps even more so given the murky dealings of Ukrainian politicians and gas "middlemen".

Perceived Russian issues served two purposes in supplying a quick easy answer combined with a backstory of plucky Brits laying prostrate before the Russian Bear. Also known as the it's not our fault (and especially not wholesale gas markets) that prices went up and stayed there.

But while Centrica said wholesale costs had continued to fall in the period, the firm could not say whether bills would see further cuts.Chief executive Sam Laidlaw said: "That is obviously a difficult question to answer. There are a number of big variables.He said factors like world prices and the potential for a repeat of the Ukrainian crisis of last winter – where a dispute between the country and Russia led to gas supplies for much of Europe being shut off for weeks – would have an impact on which direction bill prices would go.

As we noted last week, Goldman has more of an impact on gas prices than Gazprom these days. And gas supplies for much of Europe being shut off for weeks is a gross overinterpretation of the facts. Pretty much zero happened last winter, and when it did the other variable of world prices kept prices low. So Sam Laidlaw is running out of if not gas, then excuses.

Europe is less likely to suffer shortages in Russian natural gas supply this year after Ukraine signed an agreement with the European Commission and international financial institutions, the European Union said.

“This is an important step forward, reducing the risk of a gas crisis this year and helping the long-term viability of the gas sector,” Amadeu Altafaj Tardio, a commission spokesman, told a news conference in Brussels today.

Henry Hub is up 8% today, so there's hope for Centrica to blame another set of foreigners yet.